Renting vs buying in todays market
A question I get asked quite often is “Should we continue to rent or is it beneficial to buy right now?” Well, it depends on the numbers! Back when interest rates and home prices were still sky high, renting is a great temporary solution for persons who want a place of their own. However, things have changed significantly since so let’s analyze the numbers:
As an example, in Santa Ana, a 3 bed 2 bath 1500 SF SFR will rent for about $2,000/mo or more. The same 3 bed 2 bath 1500 SF SFR can be had for $275,000 to $325,000. Let’s see what the numbers look like as far as out of pocket costs and monthly payments:
| Rental ($2000/mo) | |
| Deposit (out of pocket) |
$4,000.00 |
| Monthly Lease Payment |
$2,000.00 |
| Purchase ($325,000) | |
| Down Payment (out of pocket) |
$11,375.00 |
| Principle & Interest Payments @ 3.875% |
$1,500.59 |
| Estimated Tax and Insurance |
325.00 |
| Estimated Mortgage Insurance |
332.41 |
| Estimated Monthly Housing Expense |
$2,158.00 |
Most people at this point may realize that for just a little more every month, they can experience the freedom and joy of homeownership. However, there will still be some that may say “well that’s still $158 more than renting!” Yes! That’s true but we’re forgetting that the homeowner may now qualify for an annual income deduction of around $11,000 on their tax returns for the interest paid on their mortgage, one of the many benefits of owning a home. That’s about $2,400 a year or $200 a month in savings for most folks. Mind you that we are Realtors and not CPA’s by any means, so you will need to advise your prospective buyers to consult with a CPA regarding tax related questions. However, the benefit of owning vs. buying is quite clear given the unique circumstances today where both prices and interest rates are incredibly low. Some of our thirty year products today are as low as 3.375%!
Renters need a decent credit to lease a place. If their credit is good enough for leasing, chances are, it’s probably good enough for a purchase. Can you name a few renters within your sphere of influence who may need your help?
I will be glad to answer any questions or comments you may have. Please feel free to shoot me an email at [email protected]. Stay tuned for my cash-flow analysis of investment opportunities today!
Tri Doan
Fed Minutes Causes Mortgage Rates To Rise Suddenly
The Federal Reserve has released the minutes from its last FOMC meeting, a 1-day affair held March 13, 2012. Mortgage rates in California are rising on the news.
For the un-indoctrinated, 3 weeks after it meets, the Federal Open Market Committee, the sub-group within the Federal Reserve that votes on U.S. monetary policy, publishes its meeting minutes.
Similar to the minutes from a corporate event, or condominium association meeting, the Fed Minutes recounts the conversations and debates that transpired throughout the meeting.
The Fed Minutes is a lengthy publication, often filling 10 pages or more. By contrast, the more well-known publication from the FOMC — its post-meeting press release — tends to span 6 paragraphs or less.
The extra detail contained within the Fed Minutes is Wall Street fodder, especially given the current economic uncertainty. Investors look to the Federal Reserve for clues about what’s next for the U.S. economy.
Lately, the minutes has made an out-sized impact on mortgage rates. The Fed’s words continue to swing the mortgage-backed bond market.
Today is no different.
March’s Fed Minutes is a dense one and markets are reacting. The text shows a central bank softly divided on future U.S. economic policy, and in debate about whether existing market stimulus should be removed.
The Fed has said that it’s expecting high levels of unemployment and low levels of inflation in the coming months, an outlook that leaves little reason to introduce a third round of stimulus. This is the primary reason why mortgage rates in Carlsbad have been climbing since the Fed Minutes’ release.
Since mid-March, mortgage rates dropped on speculation that the Federal Reserve would introduce a mortgage bond purchase program this quarter. Today, those expectations have reversed.
According to the minutes, the Federal Reserve believes that additional market stimulus would only be necessary “if the economy lost momentum”, or if inflation remained too far below 2 percent per year. Currently, Core PCE — the Fed’s preferred gauge of inflation — is running slightly below 2 percent.
The Federal Reserve’s next scheduled meeting is April 24-25, 2012 — its third of 8 scheduled meetings this year.
Housing And Mortgage the Experts Make Their 2012 Predictions
As the new year begins, there are no shortage of stories telling us what to expect in 2012. Housing finished 2011 with momentum and mortgage rates closed at the lowest rates of all time.
Some expect those trends to continue through the first quarter and beyond. Others expect a rapid reversal.
Who’s right and who’s wrong? A quick look through the newspapers, websites and business television programs reveals “experts” with opposing, well-delivered arguments views. It’s tough to know who to believe.
For example, here are some “on-the-record” predictions for 2012 :
- Home prices will rise in 2012 (says Freddie Mac)
- Home prices will fall in 2012 (says CBS News)
- Mortgage rates will rise in 2012 (says American Banker)
- Mortgage rates will fall in 2012 (ays the LA Times)
The issue for buyers, seller, and would-be refinancers in San Marcos and nationwide is that it can be a challenge to separate a “prediction” from fact at times.
When an argument is made on the pages of a respected newspaper or website, or is presented on CNBC or Bloomberg by a well-dressed, well-spoken industry insider, we’re inclined to believe what we read and hear.
This is human nature.
However, we must force ourselves to remember that any analysis about the future — whether it’s housing-related, mortgage-related, or something else — are based on a combination of past events and personal opinion.
Predictions are guesses about what might come next — nothing more.
For example, at the start of 2009, few people expected the 30-year fixed rate mortgage to stay below 6 percent, but it did. Then, at the start of 2010, few people expected the 30-year fixed rate mortgage to stay below 5 percent, but it did.
All we can know for certain about today’s market is that both mortgage rates and home values are low, creating favorable home-buying conditions in and around San Elijo Hills and nationwide.
At that start of last year, few people expected mortgage rates to even reach 4 percent. Today, rates “with points” price in the 3s.
What 2012 has in store we just can’t know.
5 bright spots in real estate recession
The real estate market meltdown was much more severe and has lasted much longer than even the most bearish housing market observer would ever have predicted. Rather than values taking a dip, they’ve taken a double dip in many places; and the housing sector drama has infected the job market and the entire world’s economy.
Yet, there are some very shiny silver linings to this whole mess — a handful of ways in which our mindsets, habits, behaviors and approaches to money, mortgage and even life decision-making — have been changed by this real estate market debacle. As I see it, here are the five best things about this otherwise terrible housing recession:
1.People now buy for the long term. Even Jeff Lewis, that reality TV house flipper extraordinaire, has declared that he’s tapped out of the flipping business for the foreseeable future, trading in his real estate wheeling and dealing for the design business.
Recently, he mentioned having lost six homes in the real estate market crash. While Lewis flipped homes as his business, just five years ago, many Americans — homeowners and investors alike — took a short-term view on their homes, buying them with the idea that they could count on refinancing, pulling cash out or even reselling them anytime they wanted, at a profit.
Reality check — those days are gone. Now, buyers know they’d better be prepared to stay put for somewhere between seven and 10 years (shorter in strong local markets, longer in foreclosure hot spots) before they buy if they want to break even. And this is causing them to take mortgages they can afford over time, and make smarter, longer-term choices about the homes they buy.
2. Dysfunctional properties are being weeded out and creatively reused. Municipalities like Detroit and Cleveland are demolishing blighted and decrepit properties in dead neighborhoods en masse, intentionally shrinking their cities to match their shrinking populations. These efforts are also eliminating breeding grounds for crime, and focusing resources on the neighborhoods that have a better chance of surviving and thriving in the long term.
In the so-called “slumburbias” of central California, Nevada and Arizona, McMansions are being repurposed into affordable housing for groups of seniors, artist communities and group homes.
3. American housing stock is getting an energy-efficient upgrade. The news would have you believe that every American has lost his or her home, walked away from it, or is now renting by choice. In fact, the vast majority of homeowners have simply decided to stay put.
Instead of selling and moving on up, homeowners are improving the homes they now plan to stay in for a long(er) haul. And this generation of remodeling is focused less on granite and stainless steel, and more on lowering the costs of “operating” the home and taking advantage of tax credits for installing energy-efficient doors, windows, water heaters and more. And while the first-time homebuyer tax credit is a thing of the past, the homeowner tax credits for energy-optimizing upgrades are in effect until the end of this year.
4. People are making more responsible mortgage decisions, and building financial good habits in the process. Buyers are buying far below the maximum purchase prices for which they are approved. They are reading their loan disclosures and documents before they sign them. And, thanks to the stingy mortgage market, they are spending months, even years, in the planning and preparation phases before they buy: paying down their debt; saving up for a down payment (and a cash cushion, so that a job loss wouldn’t be disastrous); being responsible and sparing in their use of credit to optimize their FICO scores; and creating strong financial habits in one fell swoop.
5. Our feelings about debt and equity have been reformed. Americans no longer use their homes like ATM machines, to pull out cash, pay off their credit cards and then start the whole overspending cycle over again. Many can’t, because their homes are upside down and cannot be refinanced in any event — much less to pull cash out.
Others have been reality-checked by the recession, and are dealing with their non-mortgage debt the old fashioned way: by ceasing the pattern of spending more than they make, and applying the self-discipline it takes to pay their bills off.
Home equity, in general, is no longer viewed as an inexhaustible source of cash. Rather, we see it as a fluctuating asset to be protected and increased — not so much through the vagaries of the market, but through the hard work of paying the principal balance down. Many of those refinancing into today’s lower rates aren’t doing it to pull cash out, as was the norm at the top of the market; instead, they are refinancing into 15-year loans to pay their homes off sooner than planned, or reducing their required payment so their extra savings can be applied to principal.
Of course, it remains to be seen how lasting these changes will be if and when home prices go up and mortgage guidelines loosen up. But since neither of these things look likely to happen in the short term, hopefully there’s a chance that these behavior shifts will become part of a permanent mindset reset for American housing consumers.
Leadership sidelines economy elects to punt
Commentary: Fed chairman’s speech a ‘Thud!’
By Lou Barnes
Markets are stumbling to a standstill at week’s end, exhausted by the last month’s worries, and today big money in New York is distracted by Hurricane Irene. Better send the help to batten the house in the Hamptons, and see if those eager one-off friends up the Hudson would mind short-notice company.
The 10-year T-note, after its dramatic dive from 3 percent to 2 percent, has settled near 2.2 percent, no better indicator of deep concern still in place.
It is football season, and one sound from games fills the air: “Thump!”
Punting.
The entire financial world had waited two weeks for Federal Reserve Chairman Ben Bernanke’s speech at the annual gathering of central bankers in Jackson Hole, Wyo.
At 8 a.m. Mountain Standard Time today … “Thud!”
As punts go, a dribbler. This whiff — no new policy, no wisdom — reflects a divided Fed, with country rascals at regional Feds in open rebellion.
The ball landed at the Fed’s Sept. 20 meeting, the chairman adding Sept. 21 for extended argument. The game will go on, but the Fed will be entirely off the field for a month, maybe more.
Bernanke did give a whole paragraph to housing, noting the credit-default spiral still under way, with defaults producing tighter credit — which, in turn, produces a weaker housing market and more defaults.
What to do about the obvious? Federal Housing Finance Agency home prices falling 5.9 percent year over year? New mortgage delinquencies declining through 2010, but gently rising in 2011?
Mortgage rates failing to follow Treasurys down, the spread opening as in disastrous 2008? The Fed refusing to roll mortgage-backed securities purchased in QE1 (the first round of the Fed’s quantitative easing)?
He didn’t swing his foot at any of that. Just passive, professorial observation.
Our other professor, President Obama, depending on the track and vigor of Hurricane Irene, may forced to interrupt his vacation.
No matter: He already punted to an economic policy speech on Sept. 4. The nation trembles in anticipation. Uh-huh. He might have demanded that Congress stay in town, get to work; but that would require the same from him. “Thwack!” Shank.
Markets live in real time, and “tempus fugit” (Latin for “time flies”) no matter how much you’d like it to pause.
Markets attend the Church of What’s Happening Now, whether the punter is in town or not.
Second-quarter U.S. gross domestic product was revised down to 1 percent. The University of Michigan’s measure of consumer confidence has plunged from 75 to 55; every such move since the 1970s has marked a new recession. Maybe this time we’re just peeved.
On Thursday, Sept. 1, we’ll get employment data from August, and the first of the August surveys from the Institute for Supply Management. Maybe the captains of the sidelines are right to wait to see the data. The fans get so emotional about things.
This week, Warren Buffett executed a signature grandstand play, putting $5 billion into troubled Bank of America. A sign of the big turn, all OK? CNBC stock-pushers said so.
BofA stock sank steadily from $15 in January to $9.50 in July, then in a week crashed to $6. He didn’t just dump $5 billion into stock. He bought cumulative preferred paying a 6 percent dividend. Do you know any safe investments paying 6 percent guaranteed today?
He also received warrants to buy 700 million shares at $7.14 and resell whenever the stock price rises a convenient distance above that level. Buffett did a similar deal with Goldman, but in the depth of panic in early ’09. No healthy institution would accept such terms today.
America is a big and diverse place. Asserting an understanding of the American state of mind at any moment is a tad grandiose. However, never since the 1930s has there been such an opening for leadership to get out of its boxes.
We are learning the hard way — very hard — that the standard prescriptions of the left and right are dead ends.
More spending, income redistribution, and regulation won’t get us out of this. Neither will do-nothing, hard-money liquidation, or nut-case imaginings.
Salvation lies in basic things: Unity of purpose. Determination to compete. Pursuit of excellence. Abandon the past and self-congratulation, and adapt.
Perhaps disgust at the national punting team will do the trick.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at [email protected]
Fed to Keep Interest Rates Low Until 2013
The Fed said in a statement following its regular policy-setting meeting Tuesday that the overall economy has grown “considerably slower” than it expected and that consumer spending “has flattened out.” Some economists in recent days have expressed concerns that the U.S. is heading for a double-dip recession.
Source: “Fed says it Will Hold Rates Fast Until mid-2013,” MSNBC.com (Aug. 9, 2011)
Fed officials “are very nervous about the economy,” says Mark Zandi, chief economist at Moody’s Analytics. “This is unprecedented for the Fed to indicate they are ready to keep rates low for two more years.”
Still, the Fed continues to forecast a moderate pick-up in growth for the economy in the second half of the year.
Here’s a closer look at rates for the week ending Aug. 4:
30-year fixed-rate mortgages: averaged 4.39 percent, downfrom last week’s 4.55 percent average. A year ago at this time, 30-year rates averaged 4.49 percent.
15-year fixed-rate mortgages: averaged 3.54 percent, dropping from last week’s 3.66 percent average.Last year at this time, 15-year rates averaged 3.95 percent.
5-year adjustable-rate mortgages: averaged 3.18 percent this week, falling from last week’s 3.25 percent average. Last year at this time, 5-year ARMs averaged 3.63 percent.
1-year adjustable-rate mortgages: were the only ones on the rise last week, averaging 3.02 percent this week, which is up from last week’s 2.95 percent average. Last year at the time, 1-year ARMs averaged 3.55 percent.
Pending Home Sales Rise in June
Lawrence Yun, NAR chief economist, said there may be some increase in closed existing-home sales. “For the majority of transactions, the lag time between pending contacts to actual closings is one to two months. Therefore, the two consecutive months of rising activity should lead to overall improvement in closed sales in upcoming months,” he said. “Though a higher than normal cancellation rate can hold back final closing figures, it could well be that some past cancellations are nothing more than delayed buying decisions rather than outright cancellations.”
Yun said tight credit and economic uncertainty have been constricting the market. “The best way to ensure a more solid recovery in housing is to simply return to normal, sound credit standards so more creditworthy home buyers can get a mortgage,” he said.
“Washington also should not rock the boat with policy changes that would negatively impact affordable credit or otherwise increase the cost of buying or owning a home,” Yun added.
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